BETA COEFFICIENTS Suppose Chance Chemical Company’s management conducted a study and concluded that if it expands its consumer products division (which is less risky than its primary business, industrial chemicals), its beta will decline from 1.2 to 0.9. However, consumer products have a somewhat lower profit margin, and this would cause its constant growth rate in earnings and dividends to fall from 6% to 4%. The following also apply: rM = 9%, rRF = 6%, and D0 = $2.00. a. Should management expand the consumer products division? Explain. b. 0 0 Assume all the facts given except the change in the beta coefficient. How low would the beta have to fall to cause the expansion to be a good one? (Hint: Set Pˆ under the new policy equal to Pˆ under the old one and find the new beta that will produce this equality.)

BETA COEFFICIENTS Suppose Chance Chemical Company’s management conducted a study and concluded that if it expands its consumer products division (which is less risky than its primary business, industrial chemicals), its beta will decline from 1.2 to 0.9. However, consumer products have a somewhat lower profit margin, and this would cause its constant growth rate in earnings and dividends to fall from 6% to 4%. The following also apply: rM = 9%, rRF = 6%, and D0 = $2.00. a. Should management expand the consumer products division? Explain. b. 0 0 Assume all the facts given except the change in the beta coefficient. How low would the beta have to fall to cause the expansion to be a good one? (Hint: Set Pˆ under the new policy equal to Pˆ under the old one and find the new beta that will produce this equality.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 21P

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